The age-old archetype of the stock picker, an analyst whose combination of market savvy, long-term foresight, technical analysis, and good ole fashioned instinct allows them to pluck ticker symbols out of the ether and slap them into a portfolio that offers massive returns is one that's always sparked interest. Many an investor has chased the mirage of being savvy enough to know precisely which companies to buy shares in, but the zeitgeist nowadays has been to eschew stock pickers in favor of passive investment. Index funds are all the rage and it's hardly a surprise when one considers that the vast majority of money managers fail to beat the S&P 500.
Does this mean that everyone should just be investing in ETFs? Is active management pointless? Should you simply allow a monkey to make all of your investment decisions? (This actually might not be such a bad idea.) To some degree, the idea that if one cannot beat the market they should buy the market is clearly a strong idea. Major index driven ETFs are relatively low risk and offer returns that, while far from guaranteed, seem to offer a fairly predictable rate of return over time. However, passive investing comes with a ceiling, and breaking past that level requires an active strategy.
Some Stock Pickers Offer Reasons to Continue with Active Investing
While the majority of professional stock pickers will fail to beat the market, there are those professional investors who have actually managed to make a career out of not just breaking even with the S&P, but showing that their active stock-picking created an advantage not available to other funds or the market as a whole. Here's just a few of Wall Street's best stock pickers.
Peter Lynch graduated from Boston College in 1965 and got a job with Fidelity Investments in 1966 due in no small part to his job as a caddy. Well, it paid off for Peter Lynch, whose strategy of "invest in what you know" helped him average an annual return of 29 percent during the 13 years he spent managing the Magellan Fund for Fidelity from 1977 to 1990. When Lynch took over the fund it had assets of some $20 million. When he left? $13 billion. Lynch coined the term "ten-bagger," drawn from baseball terminology, to refer to an investment that increased in value ten-fold.
While including the Wizard of Omaha here is incredibly obvious, his omission would be a fairly drastic oversight, so here it is. Warren Buffett's prolonged and incredible success combined with his folksy personality and personal frugality have turned him into a folk hero almost on par with Paul Bunyan, but Buffett's earned most of his reputation. While the long-term wisdom of investing in an SPDR S&P 500 ETF (SPY) is all the rage, Buffett has crushed the index over the course of his career. Buffett's strategy of value investing and holding dividend stocks for the long run has paid off as a $10,000 investment in Berkshire Hathaway (BRK.A) in 1965, the year Buffett took over, would be worth $30 million by 2005. Compare that with the $500,000 one would have gotten by investing in the S&P over the same period.
Bill Nygren is the Portfolio Manager for the Oakmark Fund (OAKMX) and he's offered up an impressive record of success. An adherent to the concept of value investing, Nygren seeks out stocks he feels are good companies available at a bargain. Bill's picks have been successful for some time. From 2001 to 2010, Bill Nygren's portfolio had a cumulative return of over 75 percent, beating the S&P over the same period by almost 60 percent.
Bruce Berkowitz is the founder and managing member of the Fairholme Fund (FAIRX), a position he arrived at after working as the Managing Director of Smith Barney, Inc. from 1993 to 1997. Berkowitz managed to beat the S&P every single year from 2000 to 2010 save 2003, when he lost out to the index by only 4.7 percent. On the whole, Berkowitz has offered investors solid returns through a strategy oriented around maintaining a small portfolio to avoid regressing to the mean. Berkowitz has managed to beat the S&P by almost 180 percent for the period of 2001-2010.
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